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* PRICE: Price depends on the expected future investment return and is determined from all the factors affecting the price.

* Capitalization rate = net income / price

* where net income = gross income x ( 1 - vacancy factor ) - operating expenses

* Average return = Y-th root of [( cash from resale + cumulated cash flow )/(initial investment )] -1

* where Y = investment period, and

* cash from resale = resale price - broker's commission and termite work - remaining loan - prepayment penalty - resale gain tax + advanced deposit and rent + remaining tax deductions for the first and the second loans

* where the resale gain tax can be calculated as follows:

Let T1 = resale gain tax; Y = investment period

T2 = cumulated straight line depreciation

= Y x ( depreciable real property / recovery period of real property )

* T3 = profit from resale = resale price - price - closing cost - broker's commission and termite work,

and T4 = cumulated losses not claimed. For nonresidential properties using accelerated method of cost recovery:

* T1 = resale tax bracket x ( 0.4 x T3 + T4 )

For all other cases

* T1 = resale tax bracket x ( T2 + T3 - T4 )

* Accumulated cash flow = sum of all the cash flows plus their market interest ( see cash flow below )

* Initial investment = down payment - advanced deposit and rent + closing cost + loan points

* Down payment = price - first and second loans

* Before tax cash flow = net income - first and second yearly loan payments

* Tax shelter = depreciation allowance + interest payment + first loan points /term of first loan + second loan points / term of second loan - net income

* Deductible losses are limited to the lesser of: Tax shelter and L0+other passive losses (Cumulated losses are carried forward to future years),

where L0 is based on the adjusted gross income (AGI), the property type, filing status, etc. For example, L0=$25,000 if AGI is less than the phase out threshold, $100,000 (or $200,000 for rehabilitation or low income housing). If AGI tops the phase out threshold, L0 is reduced by 50% of the amount that AGI exceeds the phase out threshold, until L0 is reduced to zero. For married couple filing separately, the phase out threshold is cut in half.

* where depreciation allowance = personal property value / useful life of personal property + recovery method x (depreciable real property - accumulated depreciation ) / (100 x recovery period of real property )

* where depreciable real property = price + closing cost - land value - personal property value, and

* accumulated depreciation = sum of K years of ( depreciation allowance - personal property depreciation ) where K is the K-th year from the year when the depreciation are calculated.

* After tax cash flow = before tax cash flow x ( 1 + market interest rate on cash flow x 0.5 ) + income bracket x tax shelter + $ increase in advanced deposit and rent.

* Loan amount = price x loan as % of price or dollar amount or = dollar amount such as to satisfy (net income/loan pmt) ratio

* Monthly payment = loan amount x monthly payment for each $100,000 / $100,000

* RESALE PRICES satisfy the same relationships as does the price; they are determined the same way as the price is determined.

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